Small Cap Value Report (Thu 25 July 2019) - EMR, AML, ACSO, COB, LWB, VP., GOR | Paul Scott

27th Jul '19 by Paul Scott

41 comments 9875 reads

Good morning, it's Paul here.

Thanks for the positive comments yesterday. Things work much better when I'm at home, on the south coast, and can properly devote my energies to these reports. It all goes haywire when I'm in London, so will keep away from the capital, for the time being, and certainly in this heatwave.

To catch up on a couple of things from yesterday;

Empresaria (LON:EMR)

Share price: 68.5p
No. shares: 49.0m
Market cap: £33.6m

I remember when some friends and I met management of this small, international staffing group, about 4 years ago. We came away with the idea that it was good value, and I bought some stock at about 56p. Anyway, it's largely done a Grand Old Duke of York since - as so many shares do actually. Perhaps we like to kid ourselves that we have great insights, but in reality, we often just get lucky in catching an upward surge in share price, that subsequently reverses.

One issues that bothers me with Empresaria, is the unexpected departure of the former CEO called Spencer Wreford. At company meetings (he was previously CFO) he seemed to be in control of the facts & figures. So why did he suddenly leave on 27 June 2019? That bothers me.

Today's update seems to mention numerous divisions, for such a tiny market cap company. Does that really make sense, to have all these different small subsidiaries, in different countries? I struggle to see the logic of such a business model.

Trading - the last sentence sounds reassuring;

As expected, adjusted profit before tax for the first half is anticipated to be approximately £3.7m (2018: £4.7m) excluding the costs associated with the previous CEO stepping down in June 2019 which have been treated as exceptional. This reflects the lower starting position of businesses in Germany and Japan along with the impact of Brexit uncertainty in the UK and a higher central cost base following the investments made in the second half of 2018.

The Board is positive about the prospects for the second half of the year and the Group remains on course to deliver adjusted profit before tax in line with market expectations.

Net debt - I've tried very hard, but have never really got my head around the various elements of this, and whether…

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grout123

25th Jul '19

Hi Paul. Loving the early starts. I don't recall the DB7 having a V12 engine.

JohnEustace

The internet says otherwise.

https://astonmartins.com/car-c...

andrea34

Please can you cover Gordon Dadds (LON:GOR) Paul? The final results look REALLY good, pre-ex/adjusted profit £5.9m (£2.9m) with a confident sounding outlook

I bow to your superior auto knowledge. And I thought I knew my cars. Had no idea they made a V12...

rmillaree

Marston's (LON:MARS)
I hold marstons, very anemic update that has wiped out all the good recent gains made in one foul swoop.

I think marstons will always be an industry nomad as things stand , it has so much debt that i can't imagine it would be attractive to an acquirer that has to fund the purchase. They seem to plod their own direction and i doubt there would really be any savings by merging with another enitity as i am guessing they are big enough to be efficient enough at what they do.

My hope with marstons is that profits grow by something approaching inflation, they pay a reasonable dividend , they start paying down debt (that is their main action plan right now) and hopefully the freehold grows in value in line with inflation - whilst at the same time keeping a reasonably quality estate of pubs and beer brands.

The main risk here is that the debt brings the risk of dilution if they hit the rocks again and need a rights issue for something other than expansion. I think their current estate is much better than the estate of pubs they had the last time they had to go cap in hand to the market big time i bought just after that time.

In summary i don't see this as company that is like to make anyone a quick buck anytime soon via consolidation unless one is invested in a company Marstons buys to expand.

jonno

Creditable interims from £RWA. Trading in line for the full year with net cash of £54m on the balance sheet versus market cap of about £375m. Appears to have navigated the current economic and political turmoil better than contemporaries such as £PAGE .

Also talking of £MARS full year results from £FSTA, which require a little unravelling due to the recent sale of the iconic but lower margin Fullers brewing business to Asahi. Proceeds to be reinvested in the higher margin Pubs and Hotel business with a portion returned to shareholders . Net debt at the end of June is reported as £21.7m. an enviable position. Also there is the added assurance that most of the estate is freehold.

I hold £RWA and £FSTA

Yusuf Samad

Paul
Any comment on the Trading Update from NewRiver. There was no bad news there, although no comment on valuations, that would explain the fall in price through June and July. So, Woodford and St James Place selling was responsible for the fall in price. I am surprised by the muted recovery on the Trading Update. Why isn’t management buying?

Michael Tee

Hi Paul,

Your opinion on Simply Bizz TU would be appreciated.

Michael

ambrosia

GoCompare interim result look awful, although the price hasnt tanked too much

Parsley

willhampson

A real marmite stock, Tremor International (LON:TRMR), but a Saudi fund has just disclosed a 6.4% stake in the company (from nothing). This will likely explain the rise earlier in the week. Interesting development and, I think, adds to the theory that the company will be bought out if it remains at the current valuation.

Trident

I wonder if the lawyer bubble is ever going to burst. Even out of town lawyers quote silly rates per hour.

Then you have the grotesque argument at the end of every declaration of hours spent on the job. Its always twice what you were expecting, even when you said you wanted to be warned when budgets are going over. You haggle them down, but you always get the feeling that you have been ripped off.

Admittedly clients can think having that lovely chat with their lawyer, makes them their best friend, but unfortunately they have pressed the time meter the moment the call went through.

Cowlid

£MGP is interesting.

Lots of NHS Trusts are having to ramp up outsourcing of radiology as consultants turn down overtime due to the pension AA cliffedge (must..... not...... rant......), but doing additional work outside of the NHS (particularly through a Ltd Co or LLP) removes this risk. I would not be surprised to see forecasts improved.

Had them before, but have rebought today.

jwebster

Newriver Reit (LON:NRR)

I thought the trading statement today was a bit thin with no mention of NAV or UFOF.

They did say “Pro forma LTV remained stable at 37% based on March 2019 valuations” which is a roundabout way of saying no asset write downs this quarter.

I think there is more to NRR weakness than the Woodford exit, namely the twin evils of bricks and mortar retail and UK centric business.

1. They hold assets in the hated regional retail parks sector. The update does mention 2.5% decline in footfall, which is likely an enduring trend. Plugging negative 2.5% growth into long term assets is of course not great when covered partially by debt which has a fixed liability value.
2. Exposure to pubs which are seen as declining long term, young people don’t drink as much and prefer entertainment venues not old-style pubs. I can see this, pubs are largely unattractive for the next generation (in my opinion as a general trend)
3. Fundamental long term question - can they pivot their assets into experience led destinations like the Asian markets have already done? Or just implode under a debt for equity swap and let new owners repurpose the sites.

The bull case is it has just become too cheap and due a rebound.

1. Yield is about 12% paid quarterly, although this yield is wrong as it’s not covered by UFOF. The UFOF does deliver about 10% yield, which is still high. For me, it’s a black mark against mgt to over pay the dividend as it has to be covered by more debt or asset sales, which is NAV destructive.
2. Mgt do state they are selling low yielding assets to acquire higher yielding assets to bring UFOF up to the dividend level. Yes, evidence of this, but so far only realised £30m of transactions which is not enough to move the yield on the asset base. Personally I think they should just cut the dividend to give themselves some creditability.
3. Their model is low cost rent with tenants selling high volume low cost consumables, also with an anchor food tenant, which are both internet proof. Looking at their tenant list there is some truth in that, although I expect pain from M&S down the line.
4. LTV is 37% unsecured so unlikely to hit covenants.
5. Occupancy rates holding up, no large CVA damage to date.
6. Central banks are making noises about lowering rates again, so the effective discount rate will stay low. Also more money printing is usually long term positive for property assets.

As an out of favour REIT comparison, I could buy BLND which has a dividend yield of 5.8% and a discount to NAV of about 40%. BLND is less risky IMO as only 50% of their assets are retail the rest more London/commercial focus with more enduring trends. So at a 40% NAV discount I’m almost getting their retail assets for free, if (and only if) I think their commercial assets are fair value.

So NRR isn’t actually that cheap in comparison, on a risk basis. A serious rerating up will require all the UK REITs with retail exposure (the REITs holding internet distribution centres are doing much better) as a group to be viewed more favourably. Given the low and ever lowering debt costs and discount rates, yes, they should be rated higher. But this requires far more political and economic stability in the UK than we currently experience and I personally foresee in the near term. Likely we are heading for another general election soon so that will rumble on.

Retail REITs such as NRR and BLND are cheap, so downside is limited, might be worth a hold, but a rerating event is of course a fog.

Appreciate others’ views on this too.

DWit199

Are you sure this is true? It is my understanding that most overtime worked by NHS consultants is not pensionable.

It's a function of the ridiculous tax rules. https://metro.co.uk/2019/07/08/nhs-waiting-lists-soar-as-doctors-stop-working-overtime-in-row-over-pensions-10130610/

Pension tapering is calculated on total income, from HMRC:

"For every £2 your adjusted income goes over £150,000, your annual allowance for that year reduces by £1. The minimum reduced annual allowance you can have is £10,000"

So for a consultant paid £150k base salary, any additional £2 over time earned knocks £1 off their pension contribution allowance, which is normally £40k

So the marginal earnings from overtime, in this example, is dreadful, once you add in the marginal tax rate of 45% as well.

Wol

£BUR (not sure why the £EPIC code formula doesn't work any more). Does anyone know how to get this to work?)

Definitely not a small cap any more but probably still held by a lot of SCVR readers.

Fabulous H1 results out today. Post tax profits up 36% vs forecasts (ex Stock Report) that profits will fall this year. The wording says that the profits were generated by 'cash realisations' - successful conclusions to cases not just valuation adjustments.

And the share price has fallen. Because this is a black box business, wholly dependent on the continued good judgement of the managers? Or because of continued worries about Woodford offloading his stake?

I hold and have topped up

I had a chat with my doctor in private patient mode. He works part-time in the full NHS practice, and does some occasional work in private practice.

He said the amount of hours he has to do is underestimated by patients, as being just the appointments side of things.

However, I reflect on, accurately or not, that quite a few doctors are operating on a part-time basis, women in particular, for obvious reasons, if they have younger families.

I would speculate that many calculate that when they get to a certain salary level, start to see on higher salaries, that they can survive perfectly well on pro rata pay, on a part-time basis. The number of doctors likely to work part-time was never calculated against the supply/demand curve, because of this arguable tendency.

The pension rules have further exacerbated the problem as older doctors who were more used to working full-time, and now wish to either cash out, or work part-time.

sharw

" Burford Capital (LON:BUR) (not sure why the Ediston Property Investment (LON:EPIC) code formula doesn't work any more). Does anyone know how to get this to work?) "

I have simply copied and pasted yours so whether it works or not is one of Stocko's little mysteries. Device possibly? I am on a laptop.

Small Cap Value Report (Thu 25 July 2019) - EMR, AML, ACSO, COB, LWB, VP., GOR

Empresaria (LON:EMR)

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Paul Scott

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